The New York Appellate Division, Second Department on April 6, 2016, reaffirmed in Provencal, LLC v Tower Ins. Co. of N.Y, 2016 N.Y. App. Div. LEXIS 2529, 4-5 (N.Y. App. 2d Div. Apr. 6, 2016), that whether an insurer will be precluded from raising an exclusion omitted in the insurer’s initial disclaimer in a property damage case will be governed by the common law principles of waiver and estoppel rather than strict standards imposed on an insurer under Ins. Law §3420, which is applicable to matters involving bodily injury and wrongful death arising out of an accident. This decision supports the long-standing principle outlined in Schiff v. Flack, 51 N.Y.2d 692 (1980) where the New York Court of Appeals held that coverage cannot be created by waiver where the subject matter of the complaint does not fall within the net coverage created by the insuring agreement of a policy, less exclusions. The recent ruling in the Provencal matter again demonstrates in a property damage case that waiver cannot create coverage because the underlying coverage must, in the first instance, exist if the waiver is to serve any purpose.
The underlying dispute in the Provencal matter focused on Tower Insurance Company’s denial of coverage stemming from the collapse of a retaining wall in the plaintiff’s parking lot and subsequent water damage to the interior of the building. The parties did not dispute that the cause of the retaining wall collapse was the force of runoff storm water from the neighbor’s property against the retaining wall. The lower court determined that there was no coverage for the collapse of the retaining wall or coverage for the storm water runoff because the “policy excludes loss caused directly or indirectly by flood and/or surface water regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” The underlying decision noted that the policy’s rainwater limitation and faulty design exclusion also precluded coverage.
On appeal, the insured did not dispute that the exclusion applied. Instead, the insured asserted that the insurer was precluded from relying on the exclusion because the insurer had not identified the exclusion in the initial disclaimer letter. The insured relied on New York’s Ins. Law §3420, which imposes strict requirements on an insurer to timely provided detailed written notice if the insurer disclaims coverage for matters involving wrongful death or bodily injury arising out of an accident.
The Second Department rejected the insured’s argument, specifically rejecting the application of Ins. Law §3420 to a matter involving property damage and rather used the common law principles of waiver and estoppel. The Appellate Division determined that “waiver, which is [the] voluntary and intentional relinquishment of a known right,” did not apply here because the “failure to disclaim based on an exclusion will not give rise to coverage that does not exist,” citing to the New York Court of Appeals decision in Schiff.
The Appellate Division stated that under New York law, estoppel requires proof of prejudice by the insured. In this case, the Court held that as “the plaintiff failed to make the requisite showing of prejudice, there was no basis to estop the defendants from relying on policy exclusions not detailed in their disclaiming coverage letter.”
The principles of waiver and estoppel under New York law regarding an insurer’s analysis of coverage as embodied in the Schiff decision remains alive and well to determine whether an insurer is precluded from raising an exclusion that was omitted in its initial coverage letter in third-party liability matters involving property damage. Waiver is a “voluntary and intentional relinquishment of a known right” and permits a loss of rights under a Policy Condition, not a term or exclusion. Schiff at 698. With respect to coverage, “where the issue is the existence or nonexistence of coverage (e.g., the insuring clause and exclusions), the doctrine of waiver is simply inapplicable.” Id. This is quite different from the heightened standards imposed by New York Ins. Law §3420, which, in general, requires the insurer to give written notice of a disclaimer of coverage as soon as is reasonably possible for third-party liability claims involving bodily injury or wrongful death.
This recent decision in Provencal notes that for property damage cases, it is not the heightened scrutiny of Ins. Law §3420, which is limited to bodily injury or wrongful death matters, that applies but rather the issue of estoppel and waiver on coverage. This is also distinguishable from when an insurer has access to information regarding coverage under a general liability policy and undertook a defense of the insured for three years without reserving rights; then the insurer is equitably estopped from denying coverage. See e.g., Indem. Ins. Co. of N. Am. v. Charter Oak Ins. Co., 235 A.D.2d 521, 522, (2nd Dep’t 1997).
While Provencal affirms the limitation of an insured’s claim of estoppel and waiver against an insurer, an insurer’s timeliness and thoroughness in making a coverage decision is always important.